Sometimes it pays to be lucky.
Back in 1990 when banks and Savings & Loans were failing in large numbers due to the collapse of the junk bond market Bank of America came out relatively unscathed.
Their good fortune was due more to luck than investment acumen, however.
Bank of America had almost failed in the mid-80s when bonds sold to Latin American countries began to default in large numbers. BofA’s lack of investment discipline had them over exposed to Latin American defaults to the point that regulators were all over them forcing BofA to clean up their books or risk possibly being shut down.
During the years that Bank of America was doing penance for its bad Latin American loans, many other bankers were buying carloads of junk bonds without really understanding the risk. Eventually 747 Savings and Loans failed and brought on the failure of the FSLIC in 1989.
It was primarily because of the heat from the regulators requiring that they reduce risk instead of taking more on, that BofA did not get caught up in this mess.
Now fast forward 20 years to the current debt crisis.
The affluence of the 1980s-90s was largely due to the creation of debt. Now it is payback time. Paying off debt is now a big problem for many who took it on and will continue to be until it is paid off. How long will it take to pay off the huge debit overhang the developed world must shoulder? That is the $64 trillion question, isn’t it?.
However, debt levels in emerging market countries, such as Chile, Indonesia, Australia, and Brazil are much lower than most developed countries in relationship to their total output of goods and services.
Lower debt levels in a period when carrying debt is becoming a greater and greater problem give emerging markets a decided economic advantage.
Whether emerging market countries were more disciplined than we were, or were not considered worthy of huge loans by developed countries’ bankers, like Bank of America in the late 80s, they got lucky and ended up with low debt, right now, when low debt counts for a lot.
The strong head winds facing investors in developed countries struggling to pay off debts will be felt much less in emerging markets which can divert resources into productive enterprise rather than just having to make debt payments.
Years from now, when history is written, emerging markets ought to have much better investment performance going forward than developed markets – including the U.S.
The U.S. has a still-growing mountain of debt to pay, too, and those dollars are not available to be invested in new factories and technology, and that is a problem.
Disclosure: Long EWA, ECH, EWM, ILF, IDX, IIF